The Pros and Cons of Month to Month Leases
It’s inevitable, either a tenant or owner will be faced with the question of extending a current lease in a fashion referred to “month-to-month”. What follows next is as inevitable as well. What are the pros and cons of a month-to-month lease? It’s not too uncommon of an option and it suits both tenants and owners well at times. Let’s look at the Pros and Cons of a month- to-month lease (also referred to as MTM).
Pros of Month-to-Month Leases
Flexible Lease Termination
Once a term lease (fixed period of time) ends, continuing to lease the same property in an MTM arrangement could continue indefinitely. It allows either party to end the lease at a time convenient to that party. For an owner, maybe they intend to sell the house in a few months and don’t wish to lock up a term lease and limit the type of buyers. For a tenant, a home purchase may be in the works in the coming months. An MTM can provide stability while buying a home and no need to double move or pay out the remainder of a term lease.
Reposition Term Lease End Dates
For an owner whose current lease term ends in a period of the year where the velocity of the market is not ideal (say December), an MTM lease can allow the owner to reposition the property for leasing in a more ideal time of year (like June). Repositioning can have a positive effect in the rent rate and reduced the days vacant in between tenants.
Penalty Free Lease Breaks
A month-to-month lease can be terminated at any time with a 30-day notice. Whereas a term lease may have a termination penalty for not fulfilling the entire term of the lease, an MTM lease does not have these penalties.
Increase Your Rent Rate
Since month-to-month leases pose some risk and offer flexibility, a premium rate can be achieved in most cases. Additionally, where most term leases will only allow rent adjustments at the time of renewal, MTM leases can be adjusted more frequently to mirror the activity in the market.
Cons of Month-to-Month Leases
Vacancy at a Bad Time
The same flexibility described in the Pros of the month-to-month can put your investment at risk of extended vacancy. A tenant providing a 30-day notice in October could lead to a vacant home over the November and December months or a reduction in rental rate to move the property over those times.
Potential Financial Instability
Planning and depending on certain income figures help with financial stability and managing stress. An unplanned vacancy can affect both – and in times if serious need. Maybe your income is seasonal, or there are big plans – vacation, life event, projects; a MTM lease ending in a time synchronized with other financial episodes can impact your bank account.
My Take
I’m a fan of the term lease; a set period of time to which all can plan. However, if a tenant is seeking some flexibility for a potential move, home purchase, or personal need, I can support this. The timing has to be right in terms of the time of year where it may allow a reset to a better time to be vacant in the calendar year. I don’t recommend MTM leases going into the fall/winter seasons. The other case where MTM is good is where a landlord is looking to sell or re-occupy their home in the near future. An MTM lease will allow all buyers (not just investors) to consider the home for purchase. A home with an extended term lease leaves the tenant with the right to occupy the property until the end of the lease. This may not mesh with a buyer looking to occupy.